HELOC vs Refinace with cash out

[Anonymous]

Looking to pay off an investment property mortgage (~$100K balance) which is currently at a higher interest rate using equity in primary residence. My bank is offering a HELOC with a teaser rate of 2.24%, which goes to a variable rate (currently 3.86% APR) after 12 months. Or I could refinance current mortgage ($14K balance remaining), with a high cash out to pay off the investment note. The latter would be a fixed rate. Any thoughts on pros/cons?

[Anonymous]

How long will you be in the primary residence?

Danger with HELOC is the rate could skyrocket if/when rates start increasing. I suppose you could always refinance again to lock in a rate, but you'd have to undertake two transactions vs. one if you refinance to a fixed.

[Anonymous]

You have balance of only $14k?
Why not pay it off and then throw the money at investment property? Refinance fees are so high usually that it's not worth it.

[Anonymous]

Anonymous wrote:
Looking to pay off an investment property mortgage (~$100K balance) which is currently at a higher interest rate using equity in primary residence. My bank is offering a HELOC with a teaser rate of 2.24%, which goes to a variable rate (currently 3.86% APR) after 12 months. Or I could refinance current mortgage ($14K balance remaining), with a high cash out to pay off the investment note. The latter would be a fixed rate. Any thoughts on pros/cons?

Such small numbers - this is DC?

[Anonymous]

I would look at a relatively short term cash out refinance of your primary mortgage. You could get a 10 year loan or an ARM, depending on the best rate. I HELOC that is only locked in for 12 months would make me nervous.

[Anonymous]

OP here. Both houses are in Calvert County Maryland, about an hour outside of the beltway. The investment property interest is 4.875%, so if I plan to pay off the $110K balance within 7-10 years (via either HELOC or short term refinance), I'll need the AVERAGE interest rate to be less than that over the payoff period to break even. A fixed refi rate would guarantee that, but the variable rate is more of a gamble. If HELOC rates do go up, I'll be that much more motivated to pay the loan off early. The fees to refinance will run $2500-$3500 (rolled into the balance), whereas my bank will provide a HELOC without any fees. I'll also have the flexibility to access the HELOC for any other purpose, but the refinance would commit all cashout funds to pay the mortgage. I'm leaning toward the HELOC.

[Anonymous]

Why don't you just do a straight refi of the investment property to get out of the high interest rate?

[Anonymous]

Anonymous wrote:Why don't you just do a straight refi of the investment property to get out of the high interest rate?

There are a number of reasons why this isn't a good idea:

1) You get higher interest rates on mortgages on investment properties
2) You can deduct mortgage interest on your primary residence on your taxes against W2 income, even if you are subject to AMT. For investment property interest, you can only deduct the interest against rents paid. In many cases the primary residence mortgage interest deduction is more valuable.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Why don't you just do a straight refi of the investment property to get out of the high interest rate?

There are a number of reasons why this isn't a good idea:

1) You get higher interest rates on mortgages on investment properties
2) You can deduct mortgage interest on your primary residence on your taxes against W2 income, even if you are subject to AMT. For investment property interest, you can only deduct the interest against rents paid. In many cases the primary residence mortgage interest deduction is more valuable.

Correct. The investment property interest is high because it's considered an investment property. The occupant is a close relative who is contributing modestly to the mortgage, but I wouldn't consider the property to be "under rent".